Losses made abroad do count in UK, rules Euro court

The Treasury could lose billions of pounds in tax revenue following a landmark opinion by the European Court yesterday that strikes a blow against the "fiscal sovereignty" of EU states.

The ECJ's advocate general found the British Government in breach of EU treaty law for refusing to let Marks & Spencer offset up to £30m in losses by European subsidiaries against the profits of the parent company in Britain.

If the full court upholds the opinion this year, the case could lead to an avalanche of tax demands and call into question the Chancellor's long-term budget forecasts.

British Telecom has asked for estimated relief of £400m, heading a long list of companies with claims already lodged at the Treasury.

Nick Farmer, a tax partner at Menzies chartered accountants, said the court's opinion was a major blow to the Treasury. "The amount of tax at stake in the UK is in the billions. It could amount to anywhere from £5billion to £20billion," he said.

Related Articles

Hans Eichel, Germany's finance minister, warned that the case could cost the German treasury up to €50billion (£35billion) in what amounted to a massive transfer of revenue from governments to corporations.

Germany, France, the Netherlands, Finland, Sweden, Ireland and Greece had lined up behind Britain in a rare show of collective might to contest the case, deeming it an assault on the integrity of their national tax systems.

But the advocate general, Portugal's Miguel Poiares Maduro, said that national control over tax had its limits.

"Under Community law fiscal sovereignty cannot be construed as meaning 'fiscal autarchy'. By subscribing to the treaty the member states agreed to submit to the regime of freedom of movement of persons; this gives rise to specific constraints." He said Britain's treatment of M&S breached EU single market law by creating a cross-border barrier.

"It places groups of companies wishing to establish themselves abroad at a disadvantage in relation to groups resident in the UK," he said.

The British courts had ruled that M&S subsidiaries in France, Belgium and Germany could not offset their losses in Britain because they were resident in another country and paid taxes abroad. Treasury lawyers argued that it was unreasonable to allow companies to offset losses when it was impossible to tax their profits.

The advocate general cautioned firms not to think they could engage in "loss shopping" across tax jurisdictions. He said losses by subsidiaries could not be offset if other forms of tax relief were available in the country where they were operating, such as carry-forward provisions - which exist in both France and Germany.

Sean Finn, a partner at Lovells law firm, doubted whether the Treasury would lose much revenue in the end. "This opinion raises lots of questions without giving any answers, though it will inevitably create more litigation. The advocate general has given with his left hand and taken away with his right hand," he said.

Analysts said the financial impact of the case would not be known until the ECJ spelled out the details on "retroactivity". The court has the option to wave backdated liabilities.

While the court usually backs the advocate general, it often deviates in controversial cases and pays careful heed to the EU's big paymaster states.